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Mercantile Bank Corp (NASDAQ:MBWM)
Q3 2019 Earnings Call
Oct 15, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Mercantile Bank Corporation Third Quarter 2019 Earnings Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mike Houston of Investor Relations. Please go ahead.

Mike Houston -- Managing Director

Thank you, Eileen. Good morning, everyone, and thank you for joining Mercantile Bank Corporation's conference call and webcast to discuss the company's financial results for the third quarter 2019. I'm Mike Houston with Lambert IR, Mercantile's Investor Relations firm. And joining me today are members of their management team, including Bob Kaminski, President and Chief Executive Officer; Chuck Christmas, Executive Vice President and Chief Financial Officer; and Ray Reitsma, President of Mercantile Bank, Michigan.

We'll begin the call with management's prepared remarks and then open the call up to questions. However, before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure as well as statements on the plans and objectives of the company's business.

The company's actual results could differ materially from any forward-looking statements made today due to the factors described in the company's latest Securities and Exchange Commission filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the press release issued by Mercantile today, you can access it at the company's website, www.mercbank.com.

At this time, I'd like to turn the call over to Mercantile's President and Chief Executive Officer, Bob Kaminski. Bob?

Robert B. Kaminski -- President and Chief Executive Officer

Thanks, Mike, and good morning, everyone. Thank you all for joining us today. On the call, we'll provide an update on our overall performance and financial results, along with our key areas of strategic focus. At the conclusion of our comments, we'll open the call for a question-and-answer session.

We are pleased again to deliver solid operating results for the third quarter, continuing our year-to-date strength. The bank's strong financial condition, accelerating commercial and residential mortgage loan originations and solid loan pipelines give us confidence that the healthy results achieved during the first nine months of the year will provide the foundation for continued strong performance through the rest of 2019 and in future periods.

The third quarter operating performance includes growth in net interest income resulting primarily from a higher level of earning assets. Interest margin remains solid despite rate reductions by the FOMC, reflecting our ongoing emphasis on loan pricing discipline and sound underwriting. Chuck will discuss the margin in more detail later.

Our team's emphasis on building and cultivating value-added relationships continues to successfully attract new customers as well as retain existing clients. Increased non-interest income also led to improved earnings for the quarter. The increase in mortgage banking activity fees was primarily driven by the ongoing success of strategic initiatives that were put in place several quarters ago. Mortgage banking results were also boosted by increase in mortgage refinance activity and a higher percentage of our loan production being sold.

Growth in mortgage banking income for expanded market share remains a priority for our company. Our strong team of mortgage bankers, coupled with our wide range of products and services, allows us to continue to build deep and meaningful client relationships throughout our market.

Regarding non-interest expense, we remain pleased with our work of -- with the work of our senior leadership and the entire team to diligently monitor and control overhead costs. Our objective is to be an efficiently operating company, while at the same time making the appropriate investments to ensure we are meeting our customers' needs and exceed their expectations and building a highly sustainable organization for the years to come.

Turning to the Michigan economy, trends remain steady as employment in our primary markets continue to be strong and real estate conditions remain healthy. We will continue to monitor these indicators closely for any possible shifts in these trends. The ongoing cash dividend program, including the announcement of our fourth quarter regular dividend today, exhibits our commitment to enhancing total shareholder return.

During the quarter, we also resume share repurchases under our program. Mercantile repurchased approximately 112,000 shares for $3.5 million or a weighted average all-in cost per share of $31.36 during the third quarter 2019. Mercantile is well positioned to take advantage of future growth opportunities, reflecting the excellent work of the Mercantile team in all of our markets.

Our steady core profitability, strong capital position and healthy loan pipelines will serve us well for the balance of the year and beyond. Although we operate in a potentially volatile interest rate environment, as always, we will continue to monitor both micro and macroeconomic activity, and our focus remains on creating and leveraging opportunities whatever the economic climate. We are excited about our ability to expand in our markets and continually improve in both the near-term and long-term.

That concludes my prepared remarks, and I'll turn it over to Ray.

Raymond E. Reitsma -- President and Director

Thanks, Bob. We are pleased to report loan growth during the third quarter, which represents a 7% annualized growth rate. New commercial term loan originations remained strong during the quarter, representing the highest quarterly level since the second quarter of 2016.

Approximately $153 million and $412 million in commercial term loans to new and existing borrowers were originated during the third quarter and the first nine months of 2019 respectively as our lending team continues its focus on identifying new customer relationships and meeting the needs of our existing customer base.

Our pipeline remains solid as well with $91 million for commitments in commercial construction and development loans, which we expect to fund over the next 12 to 18 months. Our asset quality is sterling as non-performing assets declined to $2.9 million or less than one-tenth of 1% total assets at September 3rd.

Recorded non-interest income during the third quarter was $6.7 million, up $2 million or nearly 42% from the prior year third quarter. This improved level of non-interest income was largely driven by increased mortgage banking, reflecting the success of ongoing strategic initiatives designed to increase market share, a higher level of refinance activity stemming from a recent decrease in rates and an increased percentage of loans sold, continuing to enhance mortgage banking income through increased market share, including an increased share in the purchase market, remains a priority and we will continue to hire proven mortgage loan originators as we are able. We also recorded continued growth during the quarter in other fee income categories, including credit and debit card income, service charges on accounts and payroll processing fees. We exercised discipline related to overhead costs as we focus on efficient delivery systems and all of our lines of business remains a priority.

That concludes my comments. I will now turn the call over to Chuck.

Chuck Christmas -- Executive Vice President and Chief Financial Officer

Thank you, Ray. Good morning, everybody. This morning, we announced net income of $12.6 million or $0.77 per diluted share for the third quarter of 2019 compared to third quarter of 2018 net income of $10.1 million or $0.61 per diluted share. Net income for the first nine months of 2019 totaled $36.1 million or $2.20 per diluted share compared to net income of $30.5 million or $1.83 per diluted share during the first nine months of 2018.

Bank-owned life insurance claims and a gain on the sale of a former branch facility increased net income during the first nine months of 2018 by approximately $3.1 million or $0.19 per diluted share. Interest income related to purchased loan accounting entries increased net income during the first nine months of 2019 by $0.9 million or $0.05 per diluted share and net income during the first nine months of 2018 by $2.7 million or $0.16 per diluted share.

Excluding the impacts of these transactions, diluted earnings per share increased $0.29, or over 17%, during the first nine months of 2019 compared to the respective 2018 period. We remain pleased with our financial condition and earnings performance and believe we are very well positioned to continue to take advantage of lending and market opportunities while delivering consistent results for our shareholders.

Our net interest margin was 3.71% during the third quarter compared to 3.79% during the second quarter of 2019. The decline in large part reflects the FOMC's decision to lower the federal funds rate by 25 basis points on July 31st, along with another 25 basis points in mid-September. About 53% of our commercial loans or approximately 36% of our total assets are tied to either The Wall Street Journal Prime Rate or the 30-day LIBOR rate. As a result, our yield on loans declined 12 basis points when comparing the third and second quarters.

Our cost of funds as a percent of average earning assets declined 4 basis points for the third quarter when compared to the second quarter, in large part reflecting a reduction in our money market deposit account grade offerings in association with the FOMC's rate decisions. We have also lowered rates on time deposit accounts. However, the impact of those rate cuts will be lagged as those deposits will not reprice until maturity date.

For the fourth quarter of 2019, we expect our net interest margin to be in a range of 3.50% to 3.55% with the lower end of the range reflecting the assumption of an additional 25 basis point rate cut as is currently widely expected by the markets on October 30th. Assuming no further FOMC rate reductions, we do not expect our net interest margin to -- we do expect our net interest margin to improve throughout 2020 as fixed rate time deposits and FHLB advances mature and can be repriced or replaced at lower rates. For example, we had $80 million in broker time deposits that mature between December and July, which we currently expect to experience a rate reduction of about 100 basis points as these loans mature and are replaced.

The reduction of excess liquidity, consisting of funds on deposit with the Federal Reserve Bank of Chicago, over the next several months, will provide further support to our net interest margin. We recorded $0.3 million in purchase loan accretion and payments received in CRE-pooled loans during the third quarter of 2019. Based on our most recent valuations and cash flow forecast on purchase loans, we expect to record additional interest income totaling $0.2 million for the fourth quarter.

Also, we expect to receive in aggregate about $1.5 million in principal payments on purchase impaired CRE-pooled loans over the next several years, which will be recorded as interest income upon receipt. The overall quality of our loan portfolio remains very strong with continued low levels of non-performing assets and loan charge-offs. Non-performing assets as a percent of total assets equaled only 8 basis points at the end of the third quarter.

Loan charge-offs totaled $0.5 million during the third quarter and totaled less than $0.8 million for the first nine months of 2019. We recorded net loan charge-offs of $0.3 million during the third quarter and $0.4 million during the first nine months of 2018, equating to only 5 and 2 basis points of average total loans respectively.

Provision expense for the third quarter totaled $0.7 million, in large part reflecting commercial loan growth. We expect to record provision expense in the range of 0.5 million to $1.0 million during the fourth quarter. Our loan loss reserve totaled $24.4 million at the end of the third quarter or 0.88% of total originated loans. This coverage ratio has remained steady for many quarters and no significant changes are expected during the remainder of 2019. With regards to CECL, we have completed our initial framework and we'll continue to be working to fine-tune the framework and the assumptions during the remainder of 2019.

Ray previously provided color on our fee income performance for the third quarter and first nine months of 2019. I will add that we expect non-interest income to be in a range of $5.6 million to $6.0 million during the fourth quarter. We recorded non-interest expense of $22.0 million during the third quarter of 2019, up $0.4 million when compared to the third quarter of 2018.

We recorded a higher level of salary and benefits expense, mainly reflecting employee merit pay increases, mortgage lender commissions and higher stock-based compensation expense. However, our FDIC insurance expense was down $0.5 million, reflecting deposit insurance credits. Currently, we expect non-interest expense to total in a range of $22.0 million to $22.5 million during the fourth quarter with our effective tax rate remaining near 19%.

Total deposits increased $303 million during the first nine months of 2019, comprised of $263 million growth in local deposits and a $40 million increase in brokered deposits. The increase in local deposits primarily reflects growth in business checking account balances associated with new C&I lending relationships and a time deposit campaign earlier in the year.

In addition, during the third quarter, we experienced seasonal deposit growth for many of our municipal deposit customers. As of the end of the third quarter, wholesale funds comprised 16% of total funds, unchanged to the level as of year-end 2018.

We remain a well-capitalized banking organization. As of September 30th, 2019, our bank's total risk-based capital ratio was 12.5% and in dollars was approximately $84 million higher than the 10% minimum required to be categorized as well capitalized.

As Bob mentioned, we were active in buying back our stock during the third quarter. For all of 2019, we have repurchased about 231,000 shares at a weighted average cost of $30.76 per share for a total cost of $7.1 million. We currently have approximately $16.5 million available in our current buyback plan.

Those are my prepared remarks. I'll now turn the call back over to Bob. Thank you.

Robert B. Kaminski -- President and Chief Executive Officer

Thank you, Chuck. That concludes management's prepared remarks. I'll open the call up to a Q&A.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Kevin Reevey with D.A. Davidson.

Kevin Reevey -- D.A. Davidson -- Analyst

Good morning.

Robert B. Kaminski -- President and Chief Executive Officer

Hi. Good morning.

Kevin Reevey -- D.A. Davidson -- Analyst

How are you?

Robert B. Kaminski -- President and Chief Executive Officer

Pretty good.

Kevin Reevey -- D.A. Davidson -- Analyst

So, first question is related to your commercial loan book -- what percentage of the variable rate portion of your commercial loan book contains floors. And if you can kind of talk about the amount of floors you're putting on new loans if at all and where those rates are?

Chuck Christmas -- Executive Vice President and Chief Financial Officer

Yeah, Kevin. This is Chuck. It's not a high percentage of loans that have floors, We do have some, we have been over the last few years trying to negotiate some floors into our into our loan relationships and we've been successful. Those that we do, I would say, I still have a few more potential rate cuts before they come into play. But I can assure you that as the Fed has started to talk about lowing rates and it actually started talking about lower rates. But we've been much more active in negotiating floors into our relationships.

Kevin Reevey -- D.A. Davidson -- Analyst

And as far as -- what are those strategies, I know you talked about some of your brokered deposits coming, what are the strategies do you have in place to mitigate NIM pressure as far as lengthening the duration of your securities portfolio or hedges?

Robert B. Kaminski -- President and Chief Executive Officer

Yeah. I mean, we're always looking at our balance sheet to help manage interest rate risk. We don't have -- currently we don't have any derivative instruments that we're involved in. Obviously first and foremost, we look at the rates that we are offering on our deposit accounts. Like most banks out there, we didn't do much, if anything, on savings and interest checking accounts while rates were going up. So there's not a lot of opportunity there to lower rates. As I mentioned in my comments, so we have been relatively aggressive in lowering rates on our money market accounts as we were relatively aggressive increasing those rates, as we saw our competition doing the same thing over the last few years. We've also been relatively aggressive similar to money market rates on lowering our CD rates.

Obviously there is a lag there, but we do have obviously every month, every day CDs that are maturing with the vast majority of those will be repricing downwards. It's more of a timing issue. It's the same with wholesale funds. One of the things that we were very big components and kept to our standards, while rates were going up was to -- when we were engaged in wholesale funds, first to go relatively long generally four to seven years as we were matching our fixed rate commercial loans. And certainly looking back now at, we would have been in a better shape with our margin had we gotten shorter and had those rate side of these [Phonetic] lower when we got the advances, but obviously available for refinancing at a much quicker pace. But in hindsight, we in '20, regardless, we still believe that that was the right thing to do. We were managing our interest rate risk for the long-term and putting that wholesale funding program into managing the interest rate risk associated with five-year fixed rate balloons, we think, was the right thing.

Even today as we sit here and look at our net interest margin over the next few quarters it's going to get banged up a little bit from the rapid reduction that the Federal Reserve has put on all banks, obviously including ours. So, it's more of a timing issue than anything else. Well, the things that we've been saying all along is that Mercantile for this composition of its balance sheet has not really been on a core basis of 3.8%, 3.9% margin bank. We've always said that we're closer to a 3.6%, 3.7% bank. We have just taken advantage over the last several -- couple of years of taking advantage of the increase in interest rate environment.

So we're giving back a little bit over the next few quarters, as I mentioned, probably around a 3.5% margin, but we do expect to start getting that back once the Fed is done lowering rates. And I think over time, perhaps by the end of next year, we'll be back to that core level. So it is more of a timing issue than anything else. But like all of our decisions here at Mercantile Bank, we are in it for the long haul, and we're going to continue to manage our balance sheet not only for short-term gains or short-term increases in our net interest margin, but to maintain that margin at least at a core level over the long-term.

Kevin Reevey -- D.A. Davidson -- Analyst

Thanks for the color. And then, I have one last question and I'll let someone jump in. The GM strike has been going on for better month. Can you talk about what you're seeing as far as the impact of that to your customers in your market.

Robert B. Kaminski -- President and Chief Executive Officer

I think Kevin overseeing is that there are some softness that has manifested itself because of what's going on with the order situation with the GM strike. I think there has been some pockets of it, nothing that's systemic. But I think the longer it goes on, certainly the deeper -- the refresh it might be some impact of that, but nothing I think widespread or significant at this point in time, just some pockets of weakness.

Kevin Reevey -- D.A. Davidson -- Analyst

Great. Thank you very much.

Operator

Our next question comes from Damon DelMonte with KBW.

Damon DelMonte -- Keefe, Bruyette & Woods -- Analyst

Hey. Good morning, guys. How are you doing today?

Robert B. Kaminski -- President and Chief Executive Officer

Good, Damon. How are you?

Damon DelMonte -- Keefe, Bruyette & Woods -- Analyst

Great, thanks. Just to kind of follow up on Kevin's last question about the impact from the GM strike, how has that -- has that at all kind of impacted your outlook for loan growth as we finish off 2019 and go into 2020?

Unidentified Speaker

.I think, if you look at what we're seeing, Damon is, as we often talk about every year, we have fundings on the loan side of -- in excess of $0.5 billion. And I think what you're going to see is that continuing for 2019 as well. I think there -- as there is challenges and aspects of the portfolio. That's always the case, there is something going on somewhere in the portfolio. But there is enough strength on a widespread basis in all segments of the portfolio that I think is not going to dampen our loan growth. I think, the dampening of the growth may be, as we talked about from time to time as they have some payoffs. We've been very fortunate thus far to 2019, we haven't had those path, but anticipate certainly them being more prevalent in the fourth quarter. But as we said on the funding side, we're always going to be consistent having sustained fundings of over $0.5 billion, and we see that for this year as well.

Damon DelMonte -- Keefe, Bruyette & Woods -- Analyst

Okay. Okay. That's helpful. And then, probably a question for Chuck here going back to the margin. So just to confirm, you said that you thought the margin would be in the 3.50% to 3.55% range, and that reflects one additional in the latter half of this year. Is that correct?

Chuck Christmas -- Executive Vice President and Chief Financial Officer

Yeah. I think the 3.50% reflects the cut later this month. If we don't get that cut that comes in December, probably on the higher side of that range.

Damon DelMonte -- Keefe, Bruyette & Woods -- Analyst

Okay. Are you guys internally forecasting any cuts in 2020?

Chuck Christmas -- Executive Vice President and Chief Financial Officer

We're not quite there yet. We are just -- as we get here through the end of the third quarter, we'll start working wholeheartedly on our budget. We do see that the market has priced one in for March. And so, that is something that we'll take a look at to determine if we want to put that one in there. But at least right now, it doesn't appear that we'll get -- hopefully it does not get too many more in 2020, maybe just that one. But it seems like right now and looking at the market expectations is, most of the decline will come here in the second half of 2019. And then we'll just build our margin back up to more of a core level throughout next year.

Damon DelMonte -- Keefe, Bruyette & Woods -- Analyst

Got it, OK. And then, just lastly, your thoughts on the buyback, have a little bit of activity this quarter. Do you think that will be a tool you guys will continue to use?

Chuck Christmas -- Executive Vice President and Chief Financial Officer

Yeah. I mean -- like I said , we're just now starting to use our new plan that we put in place in the spring that replaced our existing plan that was getting low on share availability. We went buying back in general recently anything under $32, I think will continue to be active if our price drops below that level. Again, perhaps a little bit higher. Obviously we're looking at that in conjunction with our cash dividend program. We're looking at in conjunction with our capital levels. And as we look at the various ratios that we use to take into account risk-based capital such as CRE concentrations, and so it's a blend of all that, but we definitely recognize the fact that our stock is trading very low on a have multiple basis compared to where we've historically been, not just us, but the entire banking sector.

We've got a very strong balance sheet, good earnings performance. There's always going to be some level of headwinds we want some level of excess capital to make sure we're prepared for that. But we do see an opportunity as our price does drop low to take advantage of that price, and we definitely will.

Damon DelMonte -- Keefe, Bruyette & Woods -- Analyst

Got it. Okay. That's all that I had for now. Thank you.

Robert B. Kaminski -- President and Chief Executive Officer

Thanks, Damon.

Operator

Our next question comes from John Rodis with Janney.

John Rodis -- Janney Montgomery -- Analyst

Good morning, guys.

Robert B. Kaminski -- President and Chief Executive Officer

Good morning, John.

Chuck Christmas -- Executive Vice President and Chief Financial Officer

Hey. Chuck, just not to beat this to death, but back to the margin. So, you're talking about roughly around 3%-3.5% with another 25 basis points later this year and then some improvement next year if nothing else happens. But hypothetically if the Fed were to cut 25 later this month and then another 1 to 2 times later this year, early next year, do you think -- do you think you could hold the 3.5% level instead of the modest improvement.

John Rodis -- Janney Montgomery -- Analyst

That would be a difficult situation if they get -- they continue to be very aggressive. Certainly as they continue to be very aggressive, we will see all the other yields fall as well, rates fall. And so, those money that we have maturing both in local time deposits as well as brokered deposits, and even some FHLB advances, then reprice at a greater level, so I can't put a number to it. To speak of that -- but I would think that the more aggressive the Fed is, in future periods, the more difficult and it's going to be or at the timing standpoint of us recovering to more of a core margin. So, I think it'll be one of more timing, but certainly you might impact the first and second quarter differently than what -- just one more [Indecipherable], perhaps one in March, yeah.

Yeah, it made scene. Just looking at -- just looking at the mortgage banking results and obviously they were strong. Looking beyond the fourth quarter, what do you sort of think as a more, I guess, normalized level of mortgage revenues if refi activity slows some? I mean, the second quarter was around $2.9 million in revenues. Second quarter -- I'm sorry, third quarter was close to $2.9 million, second quarter was like $1.3 million. What do you think sort of a more normalized quarter is for mortgage, given your build-out of the team?

Chuck Christmas -- Executive Vice President and Chief Financial Officer

Yeah, John, that's going to be a really difficult one to predict. Certainly on an overall trend basis as we've built that out and added additional lenders, then we will continue to embark on doing more of that in future periods. There's just so much outside environmental factors that come into play. It's very difficult to put precise numbers on it, especially on a quarterly basis. Obviously interest rates play a very significant role, especially in regards to refinance activity. It does help purchase activity, although I would say that maybe purchase activity is more based on the overall economic picture that may be interest rates are, and we have seen some nice increases just on the refis, but we've also seen some nice increases on the purchases.

So that gives me optimism for future periods as far as permanent growth, if you will, with that program. We've also, and Ray mentioned, we've been able to sell a higher percentage of the loans that we've been making than in the past. I think on a year-to-date basis, we sold almost 70% of our originations where historically it's been closer to 45%. So that comes into play. Of course, here in Michigan, especially we have seasonality with the first quarter -- during the winter months.

So, there's just so much that goes into it. It's really hard to put numbers to it. But I think I would -- I'm pretty sure that I'm accurate in saying that we will continue to see overall growth. It's just a matter of what takes place with the rate environment and those other things that I mentioned. I also mentioned when we get to that number that you quoted, that does include the amortization of mortgage servicing rights. And certainly with the lower rates and the refinancing activity we've seen, we have had to increase the amortization of our mortgage servicing rights. So, if we did see a slowdown in mortgage activity, it's likely that the amortization would also lessen as well. So, obviously there is a natural hedge in there to some degree. So, I don't want to be evasive of your answer, but it's really hard to put numbers exactly as to how the mortgage operation is going to do, given the amount of environmental factors that we have to contend with.

Robert B. Kaminski -- President and Chief Executive Officer

This is Bob, and I would add to that. We've been very intentional about the lenders that we've added to our mortgage area. These are lenders that are some veterans in our markets that have demonstrated the ability despite the environmental conditions and the things that naturally occur in the economy to develop loyal followings where they've been able to have some strong production regardless of the economic conditions. Will it be as strong as it is at a time such as right now? No, probably not. But I think overall in terms of the ability of them to generate volume to come in to the bank and new markets, new clients, new opportunities because of the fact that they've joined our organization gives us some encouragement and provides some good comfort that the mortgage banking activity will continue to be a growth area for us. The ones that we'll continue to look to add commission mortgage lenders as the department continues to grow and gain in reputation with our clients and among the mortgage community.

John Rodis -- Janney Montgomery -- Analyst

Okay. Hey, Chuck, just the MSR, what was the writedown this quarter?

Chuck Christmas -- Executive Vice President and Chief Financial Officer

We wanted to give you that offline, John. I don't have that off the top of my head.

John Rodis -- Janney Montgomery -- Analyst

Okay. Okay. Thanks, guys.

Chuck Christmas -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from Daniel Cardenas with Raymond James.

Daniel Cardenas -- Raymond James -- Analyst

Hey, guys. Good morning.

Chuck Christmas -- Executive Vice President and Chief Financial Officer

Good morning.

Daniel Cardenas -- Raymond James -- Analyst

Just -- most of my questions have been asked and answered. Just a couple of quick questions here. In terms of your operating expenses, I mean, you guys have done a really great job of controlling those throughout '19. As we look at '20, I mean, is it safe to assume that maybe a low single-digit growth rate is reasonable?

Chuck Christmas -- Executive Vice President and Chief Financial Officer

Yeah. Like I said -- Dan, this is Chuck. We're kind of just starting to get in the midst of our budget preparations for 2020. But I would say, probably a 2% increase, probably off the second quarter is probably a good -- second quarter of this year is probably a good base if you look at and maybe somewhere around 2% increase is what I would project it to be in it, most of that being in the salary area with the merit increases and those types of things.

Daniel Cardenas -- Raymond James -- Analyst

Okay. Great. And then, any color you can give us on day one impact on -- from CECL?

Chuck Christmas -- Executive Vice President and Chief Financial Officer

Yeah. As I mentioned, we're not at a point we want to give out specific numbers. We're still working through our framework with our auditor friends and making sure that we're comfortable with this brand-new model, and it's a whole different world of assumptions and economic environments, and those types of things. I don't want to go too far off the edge here. I think as we look at it, in relation to what we're doing now, there is not a significant amount of base change, if you will. We're still using our grading systems, we're still looking at environmental adjustments, still looking at the same strong loan portfolio as we switch from one day to the other. So it doesn't seem to us at the end of the day, switching from CECL is going to have a significant effect on our overall loss level -- loan loss reserve level, but I'll say that. But then I'll also say, we continue to work through. We have our framework develops, and we just got to work through the assumptions in regards to that framework and things like environmental stuff, but it doesn't look like it's going to be significant at this point.

Daniel Cardenas -- Raymond James -- Analyst

Okay, great. All right. Thanks, guys. Good quarter.

Chuck Christmas -- Executive Vice President and Chief Financial Officer

Thanks, Dan.

Operator

Our next question is a follow-up from Kevin Reevey with D.A. Davidson.

Robert B. Kaminski -- President and Chief Executive Officer

[Indecipherable] Kevin here.

Kevin Reevey -- D.A. Davidson -- Analyst

Yeah. So, I was just curious about, you've got a nice currency to do deals. So, I was just curious about your appetite for acquisitions and criteria and geographies and what you're hearing from sellers and what their appetites are, given where we are in the cycle.

Chuck Christmas -- Executive Vice President and Chief Financial Officer

Yeah. I would answer that, Kevin, the same way we have on our recent quarters that our appetite hasn't changed. We remain interested certainly in opportunities that come along, and we have, from time to time, seen some opportunities across our desk. But as we often talk about, culture is very, very important to us, and those types of things weigh very -- very significantly on our assessment of M&A opportunities. So, it probably shrinks the universe when compared to what it might be for other organizations.

So, I think there's certainly lots of talk out there, lots of conversations. But I think from our standpoint, we're staying the course. We're looking at opportunities that come down the pike, and we're being very selective and opportunistic as any of those opportunities may continue down the road in future dates.

Daniel Cardenas -- Raymond James -- Analyst

Great, thanks. That was helpful.

Chuck Christmas -- Executive Vice President and Chief Financial Officer

Thanks, Kevin.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Bob Kaminski for any closing remarks.

Robert B. Kaminski -- President and Chief Executive Officer

Yeah, thank you very much for your interest in our company. We look forward to speaking with you again in January. This call has now been completed. Thank you.

Operator

[Operator Closing Remarks]

Duration: 37 minutes

Call participants:

Mike Houston -- Managing Director

Robert B. Kaminski -- President and Chief Executive Officer

Raymond E. Reitsma -- President and Director

Chuck Christmas -- Executive Vice President and Chief Financial Officer

Unidentified Speaker

Kevin Reevey -- D.A. Davidson -- Analyst

Damon DelMonte -- Keefe, Bruyette & Woods -- Analyst

John Rodis -- Janney Montgomery -- Analyst

Daniel Cardenas -- Raymond James -- Analyst

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